Gold News

Monetary Policy Just Got Hilarious

This really is funny – except it will make people poorer...

WE CAN barely catch our breath, writes Daily Reckoning founder Bill Bonner.

We can't stop laughing.

Last week, Japan announced that it would undertake a bold and radical experiment. After 23 years of on-again, off-again deflation it decided it had had enough of things getting cheaper. It will print money until inflation reaches 2%. This, its central bankers believe, will encourage people to spend. The economy will take off.

Why is it better for people to spend more tomorrow than they want to spend today? Why is it better for prices to go up 2% than to go down 2%? Why is an economy that 'takes off' better than one that sits calmly on the runway?

Those questions will have to wait for another day; no one bothers to ask today. Economists say the secret to prosperity is to stimulate demand. Anything that stimulates 'demand' is thought to be a good thing.

It doesn't seem to matter that this proposition is transparent poppycock. People always want stuff. 'Demand' is infinite. The government doesn't have to stimulate it.

What really matters is purchasing power. And purchasing power is limited. The authorities try to get around this problem by printing money. Then, with this new money in hand, it is almost as if people had real demand!

But that's what is so breath-taking and so funny about this time we live in. Who really believes you can increase demand...and make people wealthier...by just printing up money? Who really believes you can give people more purchasing power by giving them more pieces of paper?

Apparently...just about everybody! Ha ha ha...

Real demand depends on real earnings, not just more currency. People buy things by producing things. That's 'Say's Law', named after Jean-Baptiste Say. Purchasing power — or demand — comes from production, not pieces of paper.

Economists and central bankers cannot increase real demand. But they can sure move it around!

Giving money to poor nations — foreign aid — does not make them richer; it actually undermines local industries and makes them poorer. But some people get richer. Mercedes dealers in Africa noticed that whenever a new foreign aid program was announced sales of their high-end models shot up. The insiders knew they could skim millions from the aid programs.

Now, when new quantitative easing (QE) programs are announced in Japan, Ferrari sales shoot up. Bloomberg:

'Registrations of Fiat SpA (F)'s ultra-luxury brand surged 40 percent to 144 vehicles in Japan last quarter, according to the Japan Automobile Importers Association yesterday. That's more than twice the pace in the larger US market, while demand is slumping in China, at home and across Europe.

'The surge in demand for luxury cars adds to signs that Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda are succeeding in reviving spending in the country. Stock prices are climbing back to levels before the September 2008 collapse of Lehman Brothers Holdings Inc. and households have become more confident about the economic outlook.

'"The growth is very promising, and I think we can expect these super luxury brands to introduce more models that they hadn't introduced to Japan before and to strengthen their dealership networks," said Yoshiaki Kawano, a Tokyo-based auto analyst at industry researcher IHS Automotive. "The optimism for an economic recovery is spreading."'

To sustain growth, Ferrari opened a new after-service facility in Japan this month, said Herbert Appleroth, head of the company's operations in the country.

When you print money, it's like issuing new shares in a public company. The existing shares are worth less than they were before...because each one represents less of the total company. Likewise, the currency of a nation represents the goods and services that the nation produces. Print more currency and each unit will have fewer goods and services behind it.

But some people get the new shares...or new money...and are richer. Everyone else may be poorer, but the people first in line for the free cash come out ahead. Economists and other dim observers look at the increase in Ferrari sales with approval. Bloomberg again:

'"It seems like demand is coming back," said Michiaki Ishida, a spokesman for the auto importers association. "Some people are reacting to Abenomics, so the trend may continue."'

What they don't realize is that while high-end 'demand' goes up, real demand has actually gone down. The new money reduces the purchasing power of the old money. Except for the few insiders and speculators who are first in line to get the EZ money, everyone else gets poorer.

Is that funny...or what?

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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