Quantitative Easing: Essentially a Line of Credit for the U.S. Government

Through its third round of quantitative easing, the Federal Reserve is essentially printing $85.0 billion a month in new money and buying government bonds and mortgage-backed securities with the newly printed money. The Bank of Japan has been taking similar measures for some time now and is failing to move the Japanese economy toward growth.

In spite of its failure, the Bank of Japan has taken quantitative easing to another level. The central bank announced it will inject $1.4 trillion into the Japanese economy in its attempt to end the deflation and economic misery the country has been experiencing for years. (Source: Reuters, April 5, 2013.) The Japanese economy is in a recession, and the country’s exports are in a slump.

The Bank of Japan is purchasing $73.0 billion worth of government bonds per month. In addition, it will be purchasing one trillion yen worth of exchange-traded funds (ETFs) per year and 30 billion yen worth of real estate funds. In its attempts to boost economic growth, the Bank of Japan is purchasing 70% of the new debt issued by the Japanese government.

As a result of its quantitative easing, there are fears that asset bubbles are forming in the Japanese economy. The Japanese yen has fallen in value by more than 30%, as is shown on the chart below. Key stock indices in the Japanese economy have increased substantially and are reaching beyond the highs made in 2008.

$XJY Japanese Yen Philadelphia stock chart

Chart courtesy of www.StockCharts.com

In the U.S. economy, we see the same thing happening. Quantitative easing is creating inflationary pressures, bond investors have been squeezed and are forced to take higher risks, and the stock market is moving ahead of reality.

Dear reader, we need to learn from the mistakes of the Bank of Japan and see that quantitative easing hasn’t done much to help the Japanese economy. Lowering interest rates and printing a significant amount of paper money doesn’t work in the long term.

Quantitative easing by the Federal Reserve has essentially provided the U.S. government with a line of credit to spend non-stop. Similar to the actions of the Bank of Japan, our central bank is buying up a hefty amount of new debt issued by the government. This practice cannot be sustained. I believe the longer the Fed keeps its quantitative easing programs running, the bigger our financial problems will become.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.