In sports, business or most avenues of life, people are encouraged to learn, imitate or follow the winners. In golf, we want to learn from Rory Mcllroy, Adam Scott or Phil Mickelson. In tennis, we want to emulate Novak Djokovic, Roger Federer or Rafael Nadal. To this motivational wisdom of following the winners, there is one exception, however. Central bankers seem to like to follow the loser.
Quantitative Easing (“QE”), creating money to buy bonds issued by the government, was first used by the Bank of Japan in the early part of the 2000’s. Japan was once known as the land of technological and engineering marvels, but more recently it has become known as one of the worst-managed economies in the world. The lost decades of the 1990’s/2000’s have extended into the 21st century, with subpar economic growth, Fukushima radiation out of control and a declining population amongst the list of negative trends.
Mounting Debts
Most economists measure Japan’s most negative accomplishments in the realm of public finance. Japan has the worst government balance sheet in the world. The total public debt in Japan equals more than twice of its GDP. From 45 percent in 1990, the country’s total public debt as a percentage of GDP has increased sharply and will reach 245 percent by the end of 2015.
By comparison, the U.S. government debt is now at 101 percent of GDP, Israel 70 percent, Italy 160 percent and Germany 80 percent of GDP. The average for members of the industrial countries is around 100 percent. It is difficult to understand why the G7 countries decided to follow and imitate Japan’s monetary and economic policies. It was immediately after inviting the head of the Japanese central bank, Mr. Haruhiko Kuroda to speak at the 2013 Jackson Hole central bankers’ conference, the United States introduced the most ambitious QE in our history purchasing a total of $4.2 trillion bonds by the end of October 2014.
Just last week, the European Central Bank announced its big program of quantitative easing. It plans to spend $70 billion per month for at least 19 months. Given the history of Japan as a guide, we ask, “What is the probability of success by the European Union?” We are not optimistic about the ultimate outcome because buying one's own government bonds does not generate employment when money velocity is persistently declining.
By