As we all know, the Federal Reserve announced a third round of quantitative easing (QE3) on September 13, 2012. I continue to wonder how many more bouts of quantitative easing we will see in the name of economic growth in the U.S. economy. QE4? QE5? More?
A famous quote attributed to Albert Einstein says: “Insanity is doing the same thing over and over again and expecting different results.” The Fed’s quantitative easing programs (a fancy name for increasing the money supply, printing more money), in my opinion, certainly fit the definition of insanity.
We should learn from the past. We can learn something from the Japanese economy and what happened there over the past couple of decades.
It is becoming more apparent that the U.S. economy is following in the footsteps of the Japanese economy.
Supposedly, the Fed’s spree of quantitative easing should have brought economic growth and prosperity to the U.S. economy. The well-intentioned goal was to get rid of the bad assets that the U.S. banks were holding so these banks could start lending once again—and thus, economic growth could get on its way.
In the years immediately following its economic burst, the central bank of Japan was slow to get its quantitative easing going. But once it decided to go the money-printing route, Japan’s central bank flooded the monetary system with its paper currency and kept the interest rate artificially near zero for a year, all in the hopes that the amount of bank loans to customers would pick up and other “good” things would follow.
Since 1997, outstanding bank loans have fallen 13.5% in the Japanese economy from 493 trillion yen to 426 trillion yen. At the same time, deposits have increased 26.0% from 475 trillion to 599 trillion yen. (Source: Financial Times October 25, 2012.) Despite all the quantitative easing, Japan’s citizens (inclusive of its businesses) decided to save instead of borrowing and investing.
What did the central bank of Japan do to target the falling demand for loans? The bank recently announced it would expand its asset purchase program—for the second time in two months—bringing its latest round of asset purchase to 91 trillion yen. (Source: Business Insider October 30, 2012.) If lowering interest rates and buying bank assets hasn’t worked before, what are the chances it would work in the Japanese economy now?
Coming back to the U.S. economy, we are witnessing a very similar situation. U.S. banks are holding $1.5 trillion in excess cash in their vaults (source: The Guardian August 2, 2012), but borrowing demand from bank customers is very weak, bleak even.
The reason that the Bank of Japan lowered interest rates to near zero and started rigorous amounts of quantitative easing was that the Japanese economy witnessed the bursting of an asset bubble. Japanese banks ended up having bad loans on their books and the economy entered a downward spiral—just like it did in the U.S. economy in 2007.
Clearly, quantitative easing has not worked for the Japanese economy, and I am not surprised to see that it is not working for the U.S. economy either. The problem caused by the U.S. housing bubble bursting is much bigger. Printing money doesn’t help the thousands of municipalities spread across the U.S. that can’t pay their bills. The benefits of three rounds of quantitative easing have yet to trickle down to the average American.
Robert Shiller, the Yale University economist who co-founded the S&P/Case-Shiller Index of real estate prices, was recently quoted in an interview, saying he thinks the U.S. housing market could take 50 years to get back to its once buoyant self. (Source: CNBC November 2, 2012.)
The U.S. economy is following in the footsteps of the Japanese economy. We could be looking at decades of stagnant growth and skyrocketing government debt.