Do QEs Fix Any Economy? The Question Is Rhetorical
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They come in with a tremendous bang, then go out with barely a whimper, and leave us in the very same jam that kicked off the cycle. Having since completely squandered rather than simply losing an entire decade, we must first remember Haruhiko Kuroda’s February 2013 appointment to lead Japan’s central bank was enthusiastically welcomed. A known dove, he was just what former Prime Minister Shinzo Abe wanted for the first and primary of his three reform arrows.

The nomination was greeted as shock and awe. The Nikkei stock index had been surging from hope over Abenomics, and by early 2013 it had rebounded to its highest level since all that 2008 stuff when aspirations for this monetary potential sent it way over the top. Among my favorite quotes from that time, “We are essentially gapped up because of the Kuroda thing.”

That Kuroda thing would turn out to be just what the doctor ordered. Not any doctor in the sense of a skillful practitioner who might effectively diagnose then treat what long ailed Japan, rather the quack Keynesian who had been urging the same magic elixir from before the current millennium.

Dr. Paul Krugman had continuously admonished the Japanese to “credibly promise to be irresponsible” in monetary policies. To defeat the “deflationary mindset” which was, the doc counseled, unwisely allowed to set in stone during the first of Japan’s increasing number of lost decades, Krugman reasoned the only way to get out of it was to shock the hell out of everyone’s expectations.

Haruhiko believed he had just the thing, which was, don’t laugh, the same thing but with much bigger numbers. To the Krugmans and the multitudes of Economists who only think like he does, the remedy to Japan’s never-ending nightmare lay in inflation psychology. It had to be because they had eliminated all other possibilities, at least those which Economists might be able to describe quantitatively in their econometrics without being forced to confront any math-violating singularities (such as actual monetary economics).

Furnishing S-curves and illogical jumps along them, they told officials time and again Japan needed to get in the public’s head. And the Bank of Japan would follow that advice, repeatedly, for over a decade before Abe tapped Kuroda. The original QE era.  

The magical thinking in February 2013 was adding one more “Q” to the next “QE.” Seriously, they attached another letter as a full part of this psyops before affixing a much larger number to the size of asset purchases which began that April. The underlying justification (apart from legitimately not knowing what else to do) kept gravitating toward Krugman’s Magic Number Theory.

Do the same thing repeatedly except upping the quantity until it works. Science, this is not.

By making the number so huge, it was then thought financial markets and real economy participants would see Kuroda’s BoJ differently, that crazy Haruhiko would keep on “printing money” until incendiary inflation set the yen and all JGBs under it completely ablaze. Anticipating the surefire hyperinflation, those in and around Japan’s moribund economy were really expected to begin to act no matter how much they might otherwise naturally resist.

Once that mindset was thoroughly defeated, much later it would be easy for the victorious Kuroda to come back and clean things up with so much economic prosperity at his and Abe’s backs. Cue up the parades.

As a first step, the shock, it appeared to be working. Chinese officials, for example, looked upon this QQE with beggaring horror. Gao Xiqing, president of China Investment Corp., the country’s massive sovereign wealth fund, took the highly unusual step of taking his thoughts public when angrily accusing, “the new Japanese government was aiming to boost its exports at other countries’ expense via a weaker currency.”

Gao then threatened (without any balloons, apparently): “Treating the neighbors as your garbage bin and starting a currency war would not only be dangerous for others but eventually be bad for yourself.”

Among politicians, the vast majority of the media, and maybe financiers in stocks, Kuroda’s promise to be irresponsible was at least initially taken as more than credible.

It would not last long. You’d think bigger purchases might at least buy more time.

Nope. Instead, scarcely eighteen months since these operations were begun, Kuroda’s team was already back to tinkering with the numbers still searching for the magic ones and zeroes. Even those at the Wall Street Journal by then began to think openly.

“Japan’s central bank and its main government pension fund said Friday they would pump trillions more yen into the country’s sputtering economy…Faced with fresh evidence that Prime Minister Shinzo Abe’s campaign to end the country’s long bout with deflation was faltering, the two institutions steered Japanese economic policy into the uncharted territory of extreme stimulus that appeared to go even beyond the often radical measures taken by other advanced economies in recent years.”

They call this stuff “stimulus” when barely a year and half after the start of the next Biggest Thing Ever it’s entirely too easy to see the Biggest Thing Ever isn’t producing even modest results. Rather than just coming out and admitting what it truly is, they’ll keep saying anyway how these central bankers are pouring or pumping trillions in new money into the economy.

Saying they are is the real magic.

After all, none other than Haruhiko Kuroda himself said so in June 2015 trying desperately one more time to sell his QQE.

“I trust that many of you are familiar with the story of Peter Pan, in which it says, 'The moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction.”

Everyone wants to believe. We all wish there was some beckoning circle of enlightened philosophers sitting high up in the Citadel of Knowledge, the Ideal Technocrats who know just what to do and have developed all the tools to make it work.

This belief is so powerful, in with a bang, whatever their next Big Idea ends up being it is immediately given the full benefit of the doubt.

And it inevitably fails miserably, squeaking out with scarcely a whimper. That word aptly describes Mr. Kuroda’s impending retirement (sans parade), as the Wall Street Journal just this week writes:

“The next Bank of Japan governor is likely to find a challenge similar to the one that faced departing Gov. Haruhiko Kuroda when he arrived a decade ago: stubbornly low inflation and a sluggish economy to go with it.  The difference is that Kazuo Ueda, expected to be nominated Tuesday to succeed Mr. Kuroda, will take office with less confidence that Japan’s central bank can fix those problems, which date to the 1990s.”

Ouch. Haruhiko Kuroda was no Peter Pan. Once celebrated, even feared, he leaves office having accomplished only one thing. Completely by accident, inadvertently he proved beyond a doubt the very method he championed and staked everything on was no more than a lie.

Having been exposed even in the mainstream media, why keep up the charade?

To admit defeat would mean to confess to a whole lot more. Officials everywhere around the world are unwilling, maybe even unable to do it. They can’t come clean without risking a righteously angry public coming to clean them out. Every last one.

If central banks haven’t been pouring trillions in new money into each economy, and they sure haven’t, then what they have been doing is pure deception. It’s not just that these central banks aren’t even central banks, it is the unimaginable costs the world has been left to suffer for want of any legit solution.

Too late to turn back to honestly now, better to roll out QE27, maybe slap a ‘Z’ on it this time.

To show you what I mean about costs, lets take a stroll over to QE’s next biggest proponent and practitioner, the US Federal Reserve. Those working in it had realized Japan’s program was failing from the very first one, but then rationalized how the theory was sound only badly executed by pre-Kuroda BoJ.

Thus, embarking upon America’s first QE, it was expected Ben Bernanke’s Peter Pan act would be far more, um, credible. It wasn’t. Rather than inspire a recovery, the US like Japan lost a decade which bore down hard on the country’s workforce. And just as Keynes himself had warned a hundred years ago, deflationary money is an evil which suffers labor first and foremost.

Unwilling to make such an easy, basic, most fundamental connection, Bernanke then his successors delivered QEs and pointed to the unemployment rate as some evidence for their charm. Except, time and again the unemployment rate was exposed as faulty and unreliable; if it hadn’t been, wage-driven inflation would’ve been a huge problem.

The Fed was forced to abandon the thing just a couple years ago.

Having undertaken internal review late in 2018 just as the unemployment rate was failing the most, what came out of the review was a true masterpiece of Economics theater:

“The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment…The Committee considers a wide range of indicators in making these assessments.”

The FOMC no longer relies on the unemployment rate (take this into account when Mr. Powell talks about justifying rate hikes), instead “considers a wide range of indicators” in its place.

Realize what this means: the unemployment rate has plummeted to lows not seen since the late 60s, but that in itself doesn’t mean what you might think. As Janet Yellen once realized in 2014, the true unemployment rate must be far higher for a whole lot of “hidden” economic “slack” keeping Americans and their global workforce counterparts unnecessarily sidelined.

Why? “Owing largely to nonmonetary factors.” Largely?

Maybe – first recalling Keynes before then realizing QE is not pouring trillions of currency in any economy - the factors which have suppressed economic growth and cost numerous innocent workers the potential for work or better work aren’t largely nonmonetary at all, they are mostly if not entirely monetary.  

We can readily point out repeated monetary shortfalls in all these places, but all any of these central bankers have done is QEs in response to them.

QEs are said to fix any economy, but they don’t ever work. Therefore, was any economy really fixed? It is, obviously, a rhetorical question. But one which can account for all the facts.

Those facts include by way of trivia the whimpering exit of one Haruhiko Kuroda. Feel no pity for the man. Like his contemporary counterpart Mr. Bernanke, what awaits him is acclaim and celebration though not of economic accomplishments, for there aren’t any, rather his achievements in having kept up what became the most obvious lie for as long as he did.

A Squandered Decade.

Collectively pouring trillions into fiction, not any economy, and leaving tens maybe hundreds of millions to face upheaval, destitution, an unsettling future, Mr. Kuroda stands out among his peers. For all this, we can easily foresee a Nobel Prize in his. 

Jeff Snider is Chief Strategist for Atlas Financial and co-host of the popular Eurodollar University podcast. 

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