Lesson Learned: Eight Rounds of Quantitative Easing for Japan and the Country Flirts with Recession Again
Friday, November 30th, 2012
By Michael Lombardi, MBA for Profit Confidential
Quantitative easing, a fancy name for increasing the money supply, invented by the central banks around the world, has been going on for years now. Does it work to stimulate the economy? Well, if it did work as projected by the central banks, the global economy wouldn’t be in such trouble right now.
As time goes by, central banks and the people that run them are coming to the same conclusion: quantitative easing can only go so far when it comes to improving the economy.
If you are a regular reader, you know I’ve been very critical about quantitative easing since the Federal Reserve announced QE1. I believe it serves the interests of large banks and Wall Street and does next to nothing to help the average consumer, the driving force of the economy.
However, the attitude towards quantitative easing by central banks may be changing, outside of the United States.
The central bank of England, the Bank of England, showed an astonishing development: the monetary policy committee (MPC) recently took a vote on further asset purchase. The result of the vote was eight against and one member for it. (Source: Bloomberg, November 21, 2012.)
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What was their reasoning? Why has the majority of MPC members all of a sudden turned against quantitative easing? Do they realize that quantitative easing only works for a certain period and then returns diminish, or are they looking at other central banks in the global economy and realizing it doesn’t work at all?
Maybe after seeing that the Bank of Japan, having started its eighth round of quantitative easing, is still flirting with a recession in its country, the MPC members have realized it may not be worth it.
At about the same time the Federal Reserve announced its third round of quantitative easing, the Bank of Japan took a similar step for the eighth time. The central bank of Japan announced it will buy 10 trillion yen worth of assets. (Source: The Telegraph, September 19, 2012.) Through this, the Bank of Japan hopes to end the economic slump in the Japanese economy that has lasted for 20 years now.
Quantitative easing has clearly not worked in Japan. The Bank of England is turning against it. Will more of it work in the U.S. economy? I doubt it. It hasn’t worked despite multiple attempts. But I expect the Federal Reserve to keep following in the footsteps of Japan and announce QE4—maybe going to as far as QE8—as opposed to following the Bank of England’s lead of saying no to more quantitative easing. The more money printing there is, dear reader, the higher the chances of hyperinflation and the repercussions that follow.
Where the Market Stands; Where it’s Headed:
The bear market rally that started in March of 2009 is close to the end of its rope. Until the end of this year, I expect to see the markets trading sideways on very light volume. I believe 2013 will be a key reversal year for the stock market as the bear market rally and Phase II of the secular bear market retrench.
What He Said:
“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in Profit Confidential, November 29, 2007. The Dow Jones Industrial Average peaked at 14,279 in October 2007. A “sucker’s” rally developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.
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