Zero Hedge: In the annals of modern central (bank) planning, today is a tragic day, or as DB’s Jim Reid puts it, “it is a bit of a landmark anniversary of sorts for financial markets” – it’s the 20-year anniversary of the Bank of Japan cutting rates to 0% and the start of two decades of extreme monetary policy which neither Japan, nor any other country, has ever been able to escape from.
As Reid notes, this is a “sobering template for Europe to worry about” and adds that Japan also kick started what became a more mainstream form of monetary policy post the GFC around the world.
For economic historians Japan is really a fascinating case. If you took a snapshot of the nation’s finances and demographics today with no previous knowledge of the country’s journey over the last 30 years since its asset bubble burst, you would wonder how the country isn’t in a constant crisis. Debt to GDP is the highest in the developed world at 236%. more …
Opinion: Review, what is QE and when did it begin?
A policy termed “quantitative easing” was first used by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s.
( Deflation is the general decline in prices for goods and services occurring when the inflation rate falls below 0%)
The BOJ had maintained short-term interest rates at close to zero since 1999. For many years, and as late as February 2001, it stated that “quantitative easing … is not effective” and rejected its use for monetary policy.
Short term interest rates are controlled by central banks. The BOJ like the Federal Reserve and ECB use Keynesian economics, that ascribes to government involvement in economics, hence, QE or creating new money in economic recessions.
Therefore, if governments can continually print new money, governments cannot go broke, and the amount of debt incurred in the process is ignored.
Pretty neat system right?
Wrong. By printing new money the money in existence becomes worth much less, which is the reason that private citizens are arrested for counterfeit.
Debt has a price. Japan is the most indebted country in the world as measured by debt-to-gross domestic product (GDP). As of 2018, the Japanese debt-to-GDP ratio was at an all-time high at 236%. The US, by contrast, has a debt to GDP ratio of 107%.
The problem is QE becomes like an addiction. Nations can continue to spend with reckless abandon, racking up debt that cannot be paid back, until some sort of unexpected event causes hyperinflation like what is happening in Venezuela.
It can come suddenly. Large scale money printing causes asset prices to bubble until some event causes a pop. It’s what happened on October 3, 2018, when Federal Reserve chairman Powell called for much higher interest rates, causing global market sell off that only stopped because Powell backed off his position.
There could be one more reason for a nation’s currency to collapse. The unexpected loss of tens of millions of citizens in a moment’s time, as prophesied by the Apostle Paul (1 Cor. 15:51-52; 1 Thess. 4:16-17).
Be careful if you try to tell this to someone, they will think you are nuts.