The Keynesian elite gathered in Davos Switzerland recently to pontificate on global economic issues and to strategize the engineering of The Fourth Industrial Revolution. This new so called “revolution” includes a discussion on the future of Artificial Intelligence. Judging by the comments coming from most of the list of attendees, it seems obvious the intelligence on display was indeed faux. But the most important take away from this venue was that central bankers have made it clear to the markets that the level and duration of quantitative counterfeiting knows no bounds.
European Central Bank (ECB) President, Mario Draghi, used the platform to assure investors he’ll do whatever further is needed to reach his absurd inflation goal: “We’ve plenty of instruments, said Draghi.” “We have the determination, and the willingness and the capacity of the Governing Council, to act and deploy these instruments.”
Central bankers love to use words like instruments and tools to describe the methods and strategies available to them because it makes what they actually do appear less primitive. But truth be told, the only instrument or tool central banks have is the impious power to create money and credit by decree.
Not to be outdone by the Europeans, Japan’s chief money printer, Haruhiko Kuroda, appeared downright giddy from monetary intoxication when discussing what he refers to as his
QQE--Quantitative and Qualitative Monetary Easing program. As if adding that additional “Q” somehow makes it more palatable and effective than the generic form of Quantitative Easing.
When asked by a reporter if the Bank of Japan (BOJ) had more room to ease, Kuroda glibly chuckled that the BOJ has “only” purchased 33% of all existing Government Bonds and conveyed the willingness to monetize every available sovereign debt note issued by the insolvent government of Japan.
And since Mr. Kuroda thinks destroying your nation’s currency is funny, he certainly has a lot more than Mr. Draghi to laugh about. The ECB’s balance sheet stands at roughly 25% of the Eurozone’s Gross Domestic Product; while the BOJ boasts a whopping 78% of Japan’s GDP.
In fact, it wasn’t long after Davos that Kuroda stepped up his assault on the yen by announcing Friday that the deposit rate will move 0.1% into negative territory starting February 16. Apparently, printing 80 trillion yen a year isn’t wrecking the currency fast enough for the BOJ.
As of Jan 20, 2016 the BOJ’s balance sheet had risen to 389.6 trillion yen. At the start of QQE in April of 2013 its balance sheet was just 174.7 trillion yen. For those keeping track at home that is a 123% increase in the monetary base…and they are just getting started. All this makes you wonder if the additional “Q” really stands for central bank “Quackery”.
Mr. Kuroda averred he has two thirds more JGBs to buy before he runs out of sovereign debt. But once all JGBs are owned by the BOJ the money printing won’t stop. The BOJ President said he will not balk at buying much more of the so called "lesser quality assets" such as equity ETFs and Junk bonds. But buying assets that have a lower quality than a 0.1%, 10-year Japanese bond is a difficult feat to accomplish! Especially in light of the fact that the nation has a debt to GDP ratio of 250% and has an inflation-obsessed central bank.
Turning back to Europe’s Chief Counterfeiter Mario Draghi, he has been buying 60 billion euros a month worth of European sovereign debt and has being do so for quite some time. The total goal had been to add 1.2 trillion euros ($1.4 t) to the ECB’s balance sheet; taking the total up to 3.3 trillion euros. However, that 60 billion euro per month QE program was extended until March 2017 less than 60 days ago. But now, less than two months from expanding the program, he is still not satisfied with rate of euro dilution and told the markets he’s ready to do more!
It is becoming obvious to the worldwide investment community that these central bankers will not quit printing money until inflation becomes an intrinsic and sustainable aspect of the global economy.
But the last seven years has clearly taught us that QE is great for asset prices but is ineffectual at providing viable economic growth. We don’t have to look any further than Japan for this proof. In nominal terms Japan’s GDP is up a measly 5.5% since the currency wrecking regime known as Abenomics took control in December of 2012. Meanwhile, the Nikkei and Dow has surged over 100% during that same time frame.
It is also becoming obvious to the equity markets that there is no escape from this monetary madness. After all, is there anyone who really believes that Kuroda can finally stop printing money when inflation eventually hits his arbitrary 2% target?
The central bank already owns over one third of JGBs and over half of all ETFs. What will happen to the Japanese stock market once the BOJ announces it will begin winding down ETF purchases; and has started down the path to becoming a seller?
And won’t the bond market tank after Kuroda proclaims that its bid for JGBs will be removed? The Ten-year Note must soar from 0.1%, where it is today, to at least where the 2% inflation target now stands. Then throw in a few hundred more basis points for the fact that nation’s tax base cannot service its debt at the higher interest rate.
Therefore, since the obvious result would be a complete collapse in equity and bond prices, which would lead to an unprecedented economic meltdown, the BOJ has unwittingly become trapped into an endless QQE program.
Indeed, the entire global real estate, equity and bond markets have become completely addicted to perpetual and ever increasing quantities of QE and ZIRP. It is no accident that the S&P 500 began its topping process once QE ended in October 2014. The US equity market also has become reliant on ZIRP and QE to move higher.
Asset prices and economies have become wards of central banks and their endless ability to increase the rate of new money creation. Therefore, since the global elites have placed all their faith in the fiat confetti spewed out by central banks, investors would be wise to increase their exposure to the only genuine form of money there ever was…gold.
Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”