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 trillion to $17.9 trillion. But if we learned any lesson 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 1990s with the technology boom did not manifest itself. So instead of borrowing at low rates to grow their businesses, many companies just took on cheap debt and bought back stock -- growing their earnings per share 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 comes only from real savings and investment, which lead 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 consumers deleverage. While the Fed was frantically printing money to re-inflate asset prices, most American incomes have decreased, as real after tax income has actually fallen by 5.9 percent. In fact, in this recent election we learned that 65 percent of Americans are still concerned primarily with the economy, and nearly the same number of people 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 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 intends to dump massive amounts of Japanese government bonds and double its allocation to equities, raising its investment in domestic and international stocks to 24 percent each. The Bank of Japan is also planning on tripling its annual purchase of exchange-traded funds 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 destroyed. Central bankers have succeeded in hollowing out the middle class but have failed miserably in achieving 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 but the world's third largest economy. When its currency collapses it will wipe out markets and economies worldwide. At that catastrophic moment in history investors will finally insist on putting their faith and wealth in money that can't be destroyed by governments -- gold.
