Posted by Steve Markowitz on April 27, 2012
Japan has been the poster child for economic malaise and the failure of government policies over the past three decades. While the economic meltdown hit the United States and Europe in 2007, Japan’s meltdown occurred over 23 years ago when in 1989 the Japanese Nikkei stock market hit its peak of nearly 39,000. Today that index is just over 9,500, less than 25% of its peak value.
Economist have had time to study the Japanese economic problems, its causes and the government’s failures. Japan’s problems started with the popping of the real estate bubble. It is generally agreed that continuation of the long-term downturn was caused by the government allowing “zombie banks” to continue functioning rather than having them write off their bad debt since that action would have caused many banks to go out of business. Similar to the United States and Western Europe, the Japanese government deemed these banks too big to fail.
As evidence of Japan’s ongoing economic problems, once again the Bank of Japan “BOJ” today announced it would purchase Japanese government bonds. This is similar to the Federal Reserve’s actions the United States in recent years called Quantitative Easing. The BOJ announced it would purchase an additional ¥10 trillion ($124 billion) of the bonds bringing the total purchases to almost $1.25 trillion.
This latest announcement by the Bank of Japan is merely more the same failed policies. It is evident that the United States and Europe learned little from Japan’s experiences. Japan has taken the same basic course of massive government borrowing and spending, as well as purchasing its own debt without success, in the failed effort to spur economic growth. Since 2007 meltdown, the United States and many European countries have taken the same failed approach. Either the policymakers have turned a blind eye to Japan’s reality or they are merely repeating the failed policies because they have no other suggestions.
Posted in Japan, Quantitative Easing | Tagged: Bank of Japan, BOJ, Bonds, Japan, Nikkei, QE, quantitative easing, zombie banks | Leave a Comment »
Posted by Steve Markowitz on June 1, 2011
CNBC just ran a story with significant implications to the U.S. economy. Simon Maughn, a co-head of European equities at MF Global said: “The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming.”
It was, however, Maughn’s next statement that should be of greater concern: “One more big injection of cash into the bond market should take you through at least the summer season into the beginning of the fourth quarter.” Let’s see, QE 1 (Quantitative Easing) and QE2 where the Fed purchased hundreds of billions worth of US Treasuries by printing money failed, so let’s go for with a third round. Ludicrous!
The call for QE3 should be of no surprise to anyone that follows market interventions by the government. Once unnatural forces and bailouts start acting on markets, like any drug they are addicting and difficult to stop. Maughn’s call for a QE3 is with the correct assumption that without the injection economies will head south once again. However, what is missing from Maughn and others who call for more bailouts is why should this next injection be any more successful than the first two? Also, what will stop the requirement for QE4, 5, 6, etc?
There is no such thing as a free lunch. The ongoing economic challenges were created by excess debt, which needs to be unwound. The problem cannot be rectified by adding still more debt, but moving it to the government’s balance sheet.
Posted in Debt, Quantitative Easing | Tagged: Debt, Federal Reserve, MF Global, QE1, QE2, QE3, quantitative easing, Simon Maughn | 1 Comment »
Posted by Steve Markowitz on December 9, 2010
Last month the Federal Reserve (Fed) made its second effort at quantitative easing (QE-2), which is in essence accomplished by printing money. The effort included the purchase of $600 billion worth of Treasury Bonds by the Fed. In theory, the Fed by buying the bonds should have increased aggregate demand for them, driving down their yields and increasing the values of currently held bonds. However, just the opposite has occurred.
Since QE-2, yield on 10-year Treasuries has risen 0.7 percentage point since. That means the value of investors’ bonds dropped 5.5%. In addition, the price of 30-year bonds has fallen 7%.
Treasury yields are increasing because the markets believe that QE-2 will either create inflation, create a stronger economy due to increased liquidity, or both. Irrespective of the reason, should Treasury yields spike significantly more, the cost of servicing the massive U.S. deficit will also jump creating new problems for the economy.
Posted in Deficits, Federal Reserve, Quantitative Easing | Tagged: Bonds, Deficit, Fed, Federal Reserve, QE-2, quantitative easing, Treasuries | Leave a Comment »
Posted by Steve Markowitz on October 15, 2010
The New York Time has reported that on an upcoming action by the Federal Reserve Bank (Fed) that was predictable. There will be another round of quantitative easing (QE2), which in simple terms means that the Fed will print money to buy things including U.S.
debt. Fed Chairman Ben Bernanke said: “Given the committee’s objectives, there would appear – all else being equal – to be a case for further action.” If he really wanted Americans to know what the Fed plans he would just say they will to print money.
Bernanke also said: “unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” Simply, that means there are potentially bad unintended consequences to the Fed’s quantitative easing. The ones we can foresee include the U.S. dollar taking a bath and foreigners refusing to buy our Treasuries (debt) without substantially higher interest rates. The consequences we can’t foresee; well those must wait.
It’s a challenge to predict how markets will react when the Fed moves, especially using more or less untested tools. It is likely that the equities market will initially be buoyed by the possibility that cheap money may create a stock market bubble. However, the two more important markets to follow are commodities and currencies. Should, as likely, gold go up and the U.S. Dollar goes down, they will be more ominous signs for the long-term.
Posted in Federal Reserve, Quantitative Easing | Tagged: Ben Bernanke, Debt, Fed, Federal Reserve, Gold, Markets, QE2, quantitative easing, Treasuries, U.S. Dollar | Leave a Comment »
Posted by Steve Markowitz on October 10, 2010
On October 9 this Blog posted an article titled Unemployment Getting Worse reviewing the weak unemployment numbers released earlier in the week. This newer posting adds color to those numbers and reviews likely next steps by the Federal Reserve (Fed).
In John Mauldin’s weekly newsletter, Thoughts from the Frontline Weekly Newsletter on October 8, 2001, his article The Ride of the Keynesian Cowboys digs deeper into the raw unemployment numbers a concludes:
- Last month for the first time in nearly a year the Country actually lost jobs.
- If discouraged workers are accounted for, the unemployment rate is about12%, 2.4% greater than the 9.6% official September figure.
- The civilian noninstitutional population (people over 16 available to work) is up 2 million in twelve months, but the labor force has risen by only 541,000.
- The only on major group to have an increase in employment are men and women over 65 and rose by 318,000, accounting for most of the job growth in the U.S.
While this basic data shows a disaster in the job market, it doesn’t address causes. While the high unemployment is generally blamed on the recession, Mauldin points out that immediately after the most recent recession “officially” ended in June of 2009, the minimum wage was raised by Congress. Within six months, over one-half million teen jobs were lost. In addition, Congress did other market interventions, such as the stimulus legislation that required union labor be used for various governmental programs. Yes, some of the high unemployment numbers are attributable to governmental policy in the past two years.
The unemployment numbers will come under addition pressure in the next few months. Read the rest of this entry »
Posted in Quantitative Easing, Unemployment | Tagged: Bubbles, Bush, Chrysler, Congress, Fed, Federal Reserve, General, Interest Rates, Keynesian, Obama, quantitative easing, Recession, Stimulus Plan, Unemployment | 2 Comments »
Posted by Steve Markowitz on September 29, 2010
Last week Federal Reserve (Fed) Chairman Ben Bernanke and company made some startling comments at the Federal Open Market Committee meeting that included:
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
While economists are trained to speak in a language that few can understand, the meaning of these statements is clear. The Fed is suggesting the likelihood of a new round of quantitative easing (“QE2”). QE is when the Fed prints money to create liquidity in the economy and use this new money to purchase US government debt. They want to increase liquidity in order to create higher levels of inflation. While a bit more inflation would be a good thing, once started it is difficult to contain and can quickly spiral out of control.
Already the world has expressed concern over the Fed’s statements by running up the value of gold and depreciating the US dollar. Should this trend accelerate, the consequences would serious and include higher costs for imported goods and increased interest rates as foreigners refuse to buy U.S. Treasury Notes without higher returns.
In addition, the first round of QE was a failure. The Fed rolled out QE1 in November 2008 and added to it in the months that followed. QE1 was supposed to help banks loan more to businesses and homes. Those goals were not achieved. But that doesn’t stop the Fed from considering QE2. Like a drunken gambler, they seem to believe that doubling up on a bad bet somehow mitigates risk.
The recession that started with the meltdown of the financial system more than two years ago was a traumatic jolt to the economy, possible without precedent. While this reality may have justified the radical steps attempted by the Fed initially, the failure of these actions demands a different approach going forward. Repeating the same failed policies will not result in a different outcome. Expecting otherwise is the simplest form of insanity.
Posted in Quantitative Easing, United States Debt | Tagged: Ben Bernanke, Debt, Economists, Fed, Federal Reserve, Gold, Inflation, QE2, U.S. Treasury Notes, US Dollar, US Governent | Leave a Comment »