The Complete and Total Failure of Central Banks to Create Growth

The Central Bank rig of the last five years appears to finally be ending.

Since the Great Crisis erupted in 2007-2008, Central Banks around the world have resorted to two primary tools in their efforts to reflate the system:

1) Lowering interest rates

2) Quantitative Easing or QE

Regarding #1, since 2007, Central Banks have cut interest rates an incredible 520 times. One could write a multi-volume book on the consequences of this, however, painting in broad strokes lower rates do the following:

1) Punish savers and others whom depend on fixed income for retirement

2) Continue to concentrate asset ownership in the hands of the elite who can leverage up at near zero rates to acquire more

3) Continue to encourage poor investment

4) The mispricing of assets across the board as rates no longer reflect

In the US, the Fed has now kept interest rates at zero since late 2008. The end result is that housing is once again in a bubble (home prices relative to disposable income is in fact high than in 2007) while economic growth remains anemic (GDP has not expanded at 3%+ for a single year since 2007) and employment continues to fall (the employment ratio or percentage of Americans of working age who are gainfully employed remains at levels last seen in the early ’80s.

The second most popular monetary tool employed by the world’s Central Bank is Quantitative Easing or QE.

If you’re unfamiliar with this concept, it works as follows:

1) Central Banks print money

2) They use this money to buy assets (usually sovereign bonds or mortgage backed securities)

Doing this provides liquidity to those financial institutions that own the assets the Central Bank buys. QE also allows the Government to run a massive deficit as the Central Bank becomes the de facto buyer of sovereign debt.

The entire concept of QE is based on the idea that the best means of fighting an economic contraction is monetary easing. The Fed does this to attempt to smooth the troughs from contractions.

The only problem is that QE doesn’t work. In fact, I cannot find a single instance in which it has in history.

The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job or GDP growth.

However, Japan has outdone even the UK in terms of monetary madness. Over the last 20 years has announced nine rounds of QE for a combined effort equal to 20% of its GDP. During that period GDP growth has actually slowed while unemployment has failed to fall.

Convinced that the answer to its problems is more QE, Japan launched a $1.4 trillion QE effort last month.

To put this amount into perspective, Japan’s entire GDP is $5.8 trillion. So the country effectively launched a QE program equal to 24% of its GDP in a SINGLE PROGRAM.

The end result is that by the time this program is completed, Japan will have spent QE equal to well over 40% of its GDP.

And with what results?

Inflation is rising in Japan as evinced by the increased cost of living there. Incomes have failed to rise accordingly, resulting in Japanese consumers getting squeezed.

The evidence is clear, QE has been a failure for Japan. It’s been a failure for the UK. And it’s now a failure in the US. Eventually the stock markets will figure this out. At that point the markets will collapse.

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Best Regards

Phoenix Capital Research