Economically, politically and technologically, we are all in uncharted territory. The pool of “known unknowns” and what I suspect are “unknown unknowns” is wide, deep and vast.
And then we get Japan.
For some background to Japan’s current economy, read this summary here.
In more recent years, the Bank of Japan (BoJ) has been experimenting (that is the only word that can be used in this context) with various different Quantitative Easing (QE) mechanisms.
And, most recently, one of these mechanisms has been the open market purchasing of equities on the Nikkei. The BoJ is doing this via ETF purchases, thus it does not hold the shares directly nor does it cast votes or anything else. Rather, these are broad purchases aimed at raising risk-asset valuations and, thus, stimulating risk-taking activities by investors.
I think the BoJ will fail.
In academic theory, the BoJ is operating in strange territory. The BoJ is reversing the cause and effect of the rational economic agent. People don’t spend more and take bigger risks because the market is inflated, the market becomes inflated because people are spending more and taking bigger risks.
This is a subtle point, but where does it leave the BoJ?
I have a theory that may be five, or ten or fifty years out from actually happening: the BoJ is the precursor to the ECB (and eventually the Fed) and will ultimately Communize Japan’s (and, perhaps, the world’s) capital unless something major changes.
Let me explain this with bullet points in a logical linear order:
- The BoJ prints its own money (that’s kind of the definition of what a ‘Central Bank’ is).
- Therefore the BoJ has an infinite supply of money (as long as the market keeps accepting it as a store of value) to keep buying shares in the market.
- Eventually, the BoJ will run out of shares to buy in the market (as there are, in fact, limited shares out there). At this point, the lack of economic effect and nil change at a real economic level will become very apparent.
- Thus, the BoJ will do the only logical next thing: tell the ETF’s to deliver to them the script that they own, and they will become active shareholders in the companies that they now own. They will tell these companies to spend, to invest, to hire and to grow in order to drive economic growth and healthy inflation.
- But, in essence, what has happened at this point in time is Communism (in every aspect, except law and property rights). The majority of the Japanese economy has been bought (instead of ‘taken’) and is run by a central authority, the BoJ, who is driving it for their own purpose. While the legal framework of this economy will be that of a democratic free market, the essential workings of it will be that of Communism (or, at least, an extreme Socialism).
- I.e. Capitalism has been Communized through the ultimate conclusion of QE.
And, if the EU lasts long enough, so the ECB may walk this path. The Fed’s limits could well be reached under President Trump, and thus they could be pushed into a similar course of events.
Now, this sounds like doom and gloom, but it is not. It is also a very far out thought and none of it may come to pass. People are arguing how capitalism may be collapsing, but no one seems to be asking what comes next nor how we transition there.
I merely offer this intriguing line of reasons here to stimulate some questions in your own mind. What will happen? What are the chances? Won’t Trump sort this all out?
I have no idea.