The following is an excerpt from a recent client letter.
The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way.
Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.
Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.
In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…
$1.4 trillion is…
1) The equivalent of 24% of Japan’s total annual economic output.
2) Enough to fly every human being in Japan to California for a 2-week vacation.
3) The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.
Moreover, with $1.4 trillion, you could…
1) Buy Australia’s entire economy for a year.
2) Fund NASA for the next 82 years.
3) Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.
For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding.
Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.
To whit, since announcing this program Japan has seen:
1) GDP growth accelerate for only two quarters before turning down again.
2) Prices rise for nine straight months… pushing Japan’s cost of living to a five year high.
3) Household spending crater 2.5% year over year in real terms.
4) The Yen lose an astounding 25% of its purchasing power.
5) Multiple new record trade deficits, with January being the worst ever January on record… ditto for October, November and December last year.
6) Over 77% of Japanese citizens not feeling as though Japan’s economy is improving.
In simple terms, Abenomics has failed to revitalize Japan. Just as importantly, this failure is being noticed by the press (articles regarding the failure of Abenomics have emerged in Forbes, the Financial Times, and CNBC) and is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now).
Thus, the Bank of Japan’s massive QE campaign has revealed:
1) That QE does not generate economic growth
2) There will be political consequences for its failure
Now, Central Bankers will never openly admit that they or their policies have failed. But Japan has proved that they have. It’s only a matter of time before the world catches on.
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Phoenix Capital Research