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Time To Leave The Casino (And Buy Gold)

On Friday, the Bank of Japan hit the markets with a zany announcement. It said it was going to double the country's monetary base! From Reuters:

The Bank of Japan unleashed the world's most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.

New Governor Haruhiko Kuroda committed the BoJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.

The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the US Federal Reserve's own quantitative easing program.

Will it work? Will it put some life into the Japanese economy?

Nomura Research Institute chief economist and expert on Japan's "balance sheet recession" Richard Koo says no.

Koo says this kind of monetary stimulus won't do the trick. Because businesses and households are still rebuilding their balance sheets and paying down debt. The Japanese feds may make more money and credit available, but the real economy won't take it. Instead, the money will just pour into the (speculative) stock market.

The yen fell on the announcement. And Japanese stocks shot up. But the US stock market was unimpressed. The Dow fell 40 points on Friday.

Desperation and Lunacy

What to make of it? The world's third largest economy. A jolt of money printing unprecedented in world history. And the Fed, BoE and ECB all following along.

The BoJ says it just wants to get inflation to 2%. It says it will buy bonds with fiat money that didn't exist previously... and keep buying... until inflation reaches 2%.

Then what? Well, we guess it will stop.

And then what?

Then it will have an economy that has come to expect 70 billion yen in new money every month. And an economy with a monetary base (the "stock" from which the "soup" of money supply is made) maybe twice what it is today.

We don't know what that will mean for Japan. Will the asset prices collapse again when the money printing stops?

Will the economy pick up... the banks begin to lend again... and consumers go on a spending binge?

Or will investors all over the world dump their yen, eager to get out of the Japanese paper money before inflation levels get out of control?

We don't know. But neither do the Japanese feds. As Reuters describes it above, it is a "radical gamble."

People make radical gambles now and then. Businessmen might take a chance now and then. Gamblers might go for long odds. Lovers might hope to get lucky.

Traditionally, central banks do not make "radical gambles." They tend to eschew gambles of any kind, even of the most respectable and bourgeois sort.

Central banks are meant to be stolid and boring. Spiders should be able to weave their webs in front of their vaults and remain unmolested. Central bankers are not supposed to call press conferences. (They not supposed to have anything to say in the first place.) And all requests - whether for bailouts, interviews or lunch - should be answered with an unyielding "no."

For a central bank to make a "radical gamble" bespeaks desperation and lunacy.

How this gamble will pay off, we don't know. We simply note most of the world's major central bankers are putting their money on the same color... and as the wheel spins... we urge dear readers to leave the casino.

Neither in yen, euros, pounds nor in dollars should we be. For when the dust finally settles on this wild riot of radical gambles by central bankers, gold will be the "last man standing."



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