Late last week the financial world was stunned by an announcement from the Bank of Japan that the central bank would begin a program of buying financial assets including not only Japanese government bonds but stock market based investments and real estate investment trusts.
The money (yen) used to buy these investments would be created by the Bank of Japan and injected into the Japanese economy through the banking system and financial markets.
The program is intended to drive the value of the yen lower and keep interest rates in Japan at zero percent in an attempt to spur exports and incentivize the nation’s businesses and consumers into borrowing money for spending and investment.
While not long ago this program in itself would have been considered radical in nature, now most of the excitement regarding this news came as a reaction only to the intended size of the program, which the Bank of Japan announced would be $1.4 trillion over less than two years. When considered in the context of the $6 trillion Japanese economy, this is the most intense monetary expansion program yet attempted.
With the U.S. Federal Reserve “printing” $85 billion per month in its bond buying program and the European Central Bank increasing the money supply there by $1.2 trillion in the past few years, it is quite apparent central banks in the developed economies of the world are waging an outright assault on the value of currency itself.
While the academics and theories surrounding these aggressive money printing policies may inspire confidence among economists, this type of activity is not new, having been attempted numerous times throughout history and having never really ended well.
While I do think the most dangerous words in the investment lexicon are “this time it’s different," my very nature compels me to hope that this time it is.
Regardless, the money-printing Genie is clearly out of the bottle. While logic implies that she will eventually need to be stuffed back in, during the meantime the world should remain intoxicated by liquidity for the foreseeable future.
This hyper liquid environment should, once again theoretically, bode well for financial assets and probably real estate assets as well. When money itself is being created from nothing, the things in this world representing difficult-to-create real value, such as corporations, buildings, land, commodities and food, should in theory be worth more and cost more.
For a minute there, that sounded like the definition of inflation. Oh well, we’ll deal with that later.