Yellen Hands Off Printing Press To Japan

November 10, 2014

YellenThere is a saying: “The rich just keep getting richer”. And by all accounts, since the 2008 financial crisis, they have.  Unfortunately, for the struggling poor and middle class, wealthy asset holders have been the only beneficiary of six years of Federal Reserve easy-money policies.  Under the tutelage of Ben Bernanke, the Fed introduced QE in March of 2009 with the hope it would save the economy from economic collapse.  The goal was to create a new vibrant market for borrowing to replace the former vibrant market for borrowing that had just blown up, taking the economy with it.  I am sure Ben Bernanke began this ruse with good intentions and the misplaced belief that real economic prosperity could be manufactured from creating new money. 

But as they say, hind sight is 20-20, and here we sit six years and 3.5 trillion dollars later with the realization this money printing scheme did not work as planned.  Don’t just take my word for it. According to Wall Street Journal, Former Fed Chairman Alan Greenspan said the QE program had failed to achieve its primary goals. As a means of boosting consumer demand, the asset purchase program, he said, "has not worked," though it did a good job of increasing asset prices.    

Bond king Bill Gross agrees, noting that the roughly $7 trillion pumped into the financial system since the financial crisis by the world's three biggest central banks has succeeded mostly in lifting asset prices rather than workers' wages: "Prices go up, but not the right prices."

And Hedge fund manager Paul Singer recently noted “The inflation that has infected asset prices is not to be ignored just because the middle-class spending bucket is not rising in price at the same rates as high-end real estate, stocks, bonds, art and other things that benefit from quantitative easing.”

Why QE Hasn’t Worked

The U.S. Government has done a splendid job of continuing its borrowing spree, as Federal debt has increased from $9.2 to $17.9 trillion.  But if we learned any lessons from these last few years, it should be that government borrowing and spending in the form of transfer payments (such as food stamps) doesn’t grow an economy. 

The Fed hoped that printing $3.5 trillion would encourage private companies to borrow money and grow their business by investing in property, plant and equipment.  Unfortunately, growth doesn’t happen in a vacuum.  With the consumer tapped out, business was more realistic about demand.  The idea that low interest rates and available credit would spur growth similar to what we saw in the 1990’s with the technology boom did not manifest.  Therefore, instead of borrowing at low rates to grow their businesses, many companies just took on cheap debt and bought back stock--growing their EPS but not the economy.  This kept the “beat the expectation” crowd on Wall Street happy but did nothing to encourage sustainable growth.

Central banks have failed to realize that lasting economic growth only comes from real savings and investment, which leads to an increase in labor hours and productivity.  The government’s borrowing and printing scheme left the banking system intact, but did nothing to help the average consumer.  While the Fed was frantically printing money to re-inflate asset prices, the majority of American’s incomes have decreased, as real after tax income has actually fallen by -5.9%.   In fact, in this recent election, we learned 65% of Americans are still primarily concerned with the economy, and nearly the same amount believe they are worse off since the great recession began.   This is despite manipulated data from the Federal Government meant to persuade them otherwise. 

With the prospect of viable economic growth pushed further out of reach and the Federal Reserve out of the QE game, deflationary forces should prevail and equity prices should be falling.  But, if there is one thing Central Banks are famous for, it’s not learning from past mistakes.  Fittingly, taking a page from the hyperinflationary playbook, Japan has gone on a kamikaze mission to destroy its currency; announcing an escalation of its bond purchase rate to $750 billion per year.  In addition to this, Japan’s state pension fund (the GPIF), intends to dump massive amounts of Japanese government bonds (JCB’s) and double it allocation to equities, raising its investment in domestic and international stocks to 24% each.  The BOJ is also planning on tripling its annual purchase of ETFs and other equity securities.   Japan has taken the baton from Yellen and will run with it until the nation achieves runaway inflation and its currency is completely destroyed.

Central bankers across the globe have succeeded in hallowing out the middle classes, but have failed miserably in achieving viable growth. This game will continue until the inevitable currency collapse unfolds and investors lose faith in government-manipulated asset prices. The tsunami resulting from currency, sovereign debt and equity market destruction will soon begin rolling in Japan. The problem is that Japan isn’t some isolated banana republic—it is the world’s third largest economy. When its currency collapses it will wipeout worldwide markets and economies as well.  And then, hopefully, investors will insist on putting their faith and wealth in money that can’t be destroyed by a handful of unelected and unaccountable government hacks.


Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”


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During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.

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