Doug Casey Shows You How to Profit from the Latest Central Bank Gimmick

Doug Casey Shows You How to Profit from the Latest Central Bank Gimmick

Nick Giambruno: Doug, both the Federal Reserve and Bank of Japan (BOJ) had big meetings recently.

It seems the BOJ is eager to adopt every new “innovative” policy. I’m keeping a close eye on its strategy for debasing the yen since the Fed will probably adopt that method soon enough.

The BOJ’s latest gimmick is to target the yield curve by printing currency to buy up enough government bonds to keep the 10-year rate pegged at precisely zero.

What’s your take on this?

Doug Casey: At this point, I don’t see how anyone with an IQ above room temperature can believe that these academics know what they’re doing. What’s happening in Japan is disastrous, not only for the Japanese but eventually for the rest of the world as well. Japan’s just leading the race to Dead Man’s Curve, for the moment. But what the U.S. does is much more dangerous, because the U.S. dollar is, in practice, the world’s currency.

All of the world’s central banks use the dollar as their main asset. And the dollar not only serves as the de jure national currency in several countries, but also as the de facto currency in dozens more. If the yen blows up, it’s a problem mainly for the Japanese. If the dollar blows up, it’s a worldwide catastrophe.

The U.S. is going to run trillion-dollar annual deficits in the years to come. It’s not going to be able to sell that paper to the Chinese and the Japanese as in the past. So the Fed is going to be stuffed to the gills with it. Plus a lot of toxic waste it’ll buy to prop up failing corporations as times get tough.

Nick Giambruno: The BOJ’s stock holdings also caught my attention recently. It’s now one of the top five shareholders of 81 companies on the Nikkei 225 stock index. And it’s set to be the number one shareholder of more than 55 of those companies by the end of the year, according to Bloomberg.

It’s amazing that some people still think a central bank is a free-market creature.

Doug Casey: No idea is too stupid or destructive for the bureaucrats infesting the world’s central banks. And it shows just how desperate they’ve become...

Now, in fairness, Japan isn’t the first country to try this. The Swiss National Bank is said to have bought nearly $62 billion worth of shares in the U.S. market – as a way to “manage” the value of the Swiss franc. And Hong Kong’s central bank bought local shares during the 1998 Asian crisis. Dim-witted journalists still credit this government buying spree with creating the following economic recovery – much like they wrongly credit FDR’s policies for getting us out of the Depression.

But it’s a bad idea now, just as it was then. Putting capital into the hands of bureaucrats can only lead to disastrous consequences. Because it gives them even more influence over how the companies will conduct their business – on top of the thousands of laws, regulations, and other hurdles that already stand in the way.

Plus there is always the implied threat the government will retaliate against politically incorrect decisions. So instead of running the company in order to turn a profit, the managers are making all sorts of goofy decisions to satisfy their government “partners.”

Not to mention, government ownership crowds out activist shareholders who would otherwise agitate for change. Good luck gathering enough votes to boot out the incompetent board member who was “suggested” by the government…

Incidentally, the latest fashion is for governments to set up “sovereign wealth funds,” where they invest in public and private companies’ shares. This is just asking for trouble. Nigeria is the latest one. I promise 98% of the money in its fund will disappear without a trace.

Nick Giambruno: Just to play devil’s advocate…

Doesn’t the government buying private assets drive up prices, making everyone feel wealthier and spend more money? Doesn’t it “stimulate the economy”?

Doug Casey: Of course more demand for shares will increase the share price – assuming the share count remains stable. But, perversely, the BOJ’s policy creates an incentive for companies to issue more shares, because the BOJ is taking shares off the market, and keeping the share price higher than it would otherwise be. The government “bid” allows executives and board members to fatten their pockets with stock options, while further diluting the average shareholder. As always, the main benefits accrue to the 1%. It’s true that, in a politicized economy, the rich really do get richer.

And like all government interventions, this policy sends false signals to the market. The “wealth effect” of higher stock prices is based on money that’s been printed out of thin air, not savings. In order to keep prices elevated, the BOJ has to print ever-increasing amounts of money to prop up the market. As you mentioned, they are on track to becoming the number one shareholder in a shockingly short time…

These actions always have unintended consequences as well. For instance, liquidity can dry up because one owner holds this giant block of shares – making it harder for other shareholders to dispose of their shares. A liquidity crisis already occurred in the Japanese bond market earlier this year because the government owns the largest blocks there, too…

Nick Giambruno: Stepping back for a moment, it’s incredible that central banks actually try to create inflation.

After all, the U.S. government sold the Fed to Americans by promising it would preserve the value of the dollar – not squash it.

Doug Casey: Correct. And even then, they had to slip it through Congress during the Christmas break when most Senators had gone home. A trick that Obama repeated nearly a century later, by the way, when he signed the National Defense Authorization Act authorizing indefinite detention of American citizens.

It’s one more example of a program sold to the public in the aftermath of a crisis created by the government itself. Like the Department of Homeland Security after 9/11. The so-called Patriot Act. Or the giant bureaucracy that’s grown alongside Obamacare. Once these institutions are in place, they are almost impossible to get rid of. Remember, the Prime Directive of every organism is to survive… and that implies growth, and the acquisition and control of more and more resources. Individual Federal Reserve members and Bank of Japan directors naturally want more power.

Every country in the world has a central bank, and they’re all doing exactly the same thing: creating currency units out of thin air as fast as they think they can get away with. They feel they have no alternative. Take Gideon Gono, who was the head of the Zimbabwe Reserve Bank when it issued 100 trillion dollar notes. I know him personally. He didn’t do it because he thought it was a good idea. He did it because he felt he had no alternative, and was following the best accepted practice. It sounds incredible, but it’s true.

And they are all trapped, because if they take their foot off the gas pedal, the markets will drop from the loss of liquidity. Like during the so-called “taper tantrum” of 2013, when the Fed merely suggested a slowdown in its bond purchases. Former Fed Chairman Bernanke backed off immediately when the 10-year bond yield spiked 1.4%.

But, as you noted, it’s odd they’re trying to actually create inflation. Why might that be? I suspect it’s because they fear a catastrophic deflationary collapse, with bond defaults and stock and real estate crashes. So they’re printing up even more paper money—which will create even more bubbles—to prevent it. They’re actually quite stupid.

And all these central bankers talk to each other. They all went to the same schools, they gather together at Jackson Hole, Wyoming, every September… and meet at Davos every winter…

These people all have the same worthless degrees from major universities, where they were taught by people like Ben Bernanke. In fact, Bernanke made a well-publicized visit to Japan this summer, where he reportedly lectured them on the virtues of “Helicopter Money.”

So you can be sure that the BOJ will print trillions and trillions of new yen, and try every stupid idea that’s dreamed up in the Ivory Towers…

Who knows? Maybe they’ll be the first to try Paul Krugman’s idea of minting a trillion-dollar coin to pay off the national debt.

Nick Giambruno: It reminds me of the 1989 Batman movie, where the Joker (played by Jack Nicholson) showers a crowded Gotham street with free money.

It looks like it’s raining hundred-dollar bills. The people love it. But they don’t know it’s actually a trap. Once the Joker lures them into the street, he poisons the unsuspecting crowd with gas.

Back to Japan. One of the new twists in the BOJ’s recent meeting was a pledge to maintain a “steep” yield curve. In their view, that means negative rates on the short end (the overnight rate for banks borrowing from each other) and the grand sum of “zero” on the 10-year rate.

Doug Casey: It’s just one more example of how degraded modern finance has become. Evidently they’re doing this to help the banks, insurance companies, and pension funds that need to invest a certain percentage in long-term bonds. They were getting squeezed by negative rates on those assets. And these days a large pension fund or insurance company can’t go to the bank and take out millions of dollars in cash to put in a safe. So in that sense, zero return is better than having to pay the government to hold its debt…

But of course this does nothing to ease the burden of the average Japanese citizen who has his life savings in yen. He’s not getting any return on his savings, if he leaves it in the bank. So quite correctly, many Japanese have decided to buy safes to store gold and cash at home.

Nick Giambruno: So Doug, how does this end for Japan? Any investment implications?

Doug Casey: Well, I used to say that all fiat currencies (including the yen) would reach their intrinsic value – namely, the value of the paper they’re printed on. But with the global war on cash, even that may be too optimistic…

As far as the Japanese stock market, I’m standing aside for now. I could make the case that the Nikkei will continue to rise as the government prints increasing amounts of yen to purchase shares. At some point stocks will crash, as investors lose faith in the BOJ and the yen itself… That would create an ideal crisis-investing situation.

But I’ll give you a prediction. The Greater Depression is going to be worse than even I think it’s going to be.

Nick Giambruno: Thanks for your time, Doug.

Doug Casey: My pleasure, Nick.

Editor’s Note: Unfortunately, most people have no idea what really happens when a currency crashes, let alone how to prepare…

The coming economic collapse is going to be much worse, much longer, and very different than what we’ve seen in the past.

That’s exactly why New York Times best-selling author Doug Casey and his team just released an urgent video. Click here to watch it now.


Nick Giambruno

Nick is Doug Casey’s globetrotting companion and is the Senior Editor of Casey Research’s International Man. He writes about economics, offshore banking, second passports, value investing in crisis markets, geopolitics, and surviving a financial collapse, among other topics. He is a CFA charterholder. In short, Nick’s work helps people make the most of their personal freedom and financial opportunity around the world. To get his free video crash course, click here.

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